Hong Kong (Business Emerge), August 16: In a significant shift within China’s auditing landscape, Ernst & Young (EY) and KPMG have emerged as the primary beneficiaries of a widespread exodus of corporate clients from PricewaterhouseCoopers (PwC). This departure comes amid an ongoing regulatory investigation into PwC’s auditing practices, particularly its long-term involvement with the embattled property giant, China Evergrande Group.
Chinese regulators initiated a probe into PwC’s auditing of China Evergrande after the securities regulator accused the developer of a $78 billion fraud in March. PwC had been the auditor for Evergrande for nearly 14 years before their partnership ended in early 2023. As the investigation continues, regulators have reportedly urged several large state-owned enterprises to sever ties with PwC since April, sparking an unusual wave of client departures.
Official filings reveal that over 40 companies, many of which are significant state-owned enterprises or financial institutions, have either dismissed PwC as their auditor or decided against hiring the firm in recent months. Notable departures include major clients like Bank of China, China Life Insurance, and PetroChina, who collectively contributed millions in accounting fees to PwC last year.
The impact on PwC’s client base has been substantial. According to Fan Zhongwen, an accounting professor at City University of Hong Kong, the firm is experiencing a dramatic client loss not seen in previous years. This has allowed competitors EY and KPMG to capture over half of PwC’s fleeing clients, solidifying their positions in the market.
Sources indicate that PwC’s tarnished reputation, compounded by the prospect of hefty penalties, has led many clients to reconsider their association with the firm. The Chinese government’s advisories, cautioning state-owned firms and listed companies against employing auditors with recent regulatory fines or penalties, have further fueled this trend.
PwC’s refusal to comment on the situation, coupled with no response from EY and KPMG, leaves many questions unanswered. Nonetheless, experts suggest that PwC’s client attrition is likely to persist in the near term, as the firm works to rebuild trust and recover from the reputational damage inflicted by the Evergrande scandal.
PwC Zhong Tian LLP, the firm’s main onshore arm, reported revenues of 7.92 billion yuan in 2022, making it the highest-earning auditor in China for that year. However, with EY, Deloitte, and KPMG close on its heels, the firm faces an uphill battle to maintain its lead in the wake of this crisis.